Strategic environmental policy, clean technologies and the learning curve

In the political discussion, it is often emphasized that the environmental service industry (which produces a clean factor of production) benefits from an early and strong environmental policy. This is especially likely if the costs of production are decreasing over time due to learning curve effects. Surprisingly, the environmental service industry has not been integrated into the theory of strategic environmental policy yet. Our main question is whether a national leadership in environmental policy can pay off if profits of the environmental service industry are taken into account. We consider a two-period model with one firm in each country competing on a third market. Emissions can be substituted by the clean factor when deciding upon the production technology. The unit costs of producing the clean factor in the second period are decreasing in the quantity produced in the initial period. We derive the optimal environmental policy for both periods from a national point of view and show that the presence of the environmental service industry can indeed lead to a national leadership in pollution control.